The European Commission is considering imposing value added tax (VAT) on reward-based crowdfunding, which could force businesses to charge on the value of any items sent to donors.

Proposals to levy a purchase tax on crowdfunding rewards, which means the incentives offered to small backers, were sent to the European Union’s Value Added Tax Committee in April.

The committee is now investigating whether or not crowdfunding on platforms such as Kickstarter and Indiegogo should be liable for VAT. Crowdfunding is a growing market in Europe as elsewhere in the world, with a report putting the total transaction value of reward-based crowdfunding reaching 120.3 million euros in 2014, while equity-based crowdfunding was valued at 82.6 million euros.

The investigation will also decide whether crowdfunding is a financial service as defined by the European Union VAT Directive. If not, intermediary services provided by crowdfunding platforms available will also become liable to VAT. Similar reviews have recently taken place regarding VAT on bitcoins and other digital currencies.

The VAT Committee has ruled out imposing tax on donation-based crowdfunding, as no rewards are given to contributors and therefore there is no taxable supply of goods or services. The committee said:

“With regard to reward-based crowdfunding, where the contributor to the crowdfunding receives goods or services from the entrepreneur in exchange for the support given, several VAT issues need analysis.”

“Notably, whether there is a supply of goods or services for VAT purposes by the entrepreneur in charge of the project to the contributor. If so, it needs to be clarified whether the contribution made should be seen as a payment on account of the goods or services to be received, as well as the corresponding taxable amount. It is also necessary to consider the extent up to which a potential supply may be affected if the value of the goods or services supplied is symbolic.”

The VAT Committee said it is aware such a tax imposition would primarily impact entrepreneurs and small businesses that rely on crowdfunding as a means of raising finance. It continued:

“Given that reward-crowdfunding is a financing instrument mostly used by startups and small businesses or individuals getting going a project, the question whether such starting entrepreneurs qualify as taxable persons even when no taxable output is yet realised, seems a timely one. This is a matter of major significance, notably concerning the right of deduction of the entrepreneurs.”

The investigation has raised concerns that the imposition of VAT on reward-based crowdfunding could discourage startups from using such services.

Sherwood Neiss, Principal at Crowdfund Capital Advisors LLC, which is based out of Miami, San Francisco, New York, Washington D.C., Hong Kong and Dubai, said any type of tax causes backers to pause, especially in crowdfunding where the goal is to promote entrepreneurship, innovation and jobs.

“VAT in the case of crowdfunding is a disincentive to both campaign sponsors and donors/backers,” he said, continuing:

“VAT works best for established businesses where products are already in production, a business that is firmly established and can handle the infrastructure — technology and staff — of VAT receivables and payments, and customers that expect it. Crowdfunding companies by nature are smaller and don’t have the infrastructure in place to support the burden of a VAT.”

Neiss urges the European Union to save VAT for companies that have been around for more than two years and have product sales that are not pre-order based.

Cointelegraph reached out to a number of crowdfunding platforms for their views on the projected VAT imposition, but all declined to comment until a decision has been made.